Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets

We consider three models of investments in generation capacity in restructured electricity systems that differ by their underlying economic assumptions. The first model assumes a perfect, competitive equilibrium. It is very similar to the old capacity expansion models even if its economic interpretation is different. The second model (open-loop Cournot game) extends the Cournot model to include investments in new generation capacities. This model can be interpreted as describing investments in an oligopolistic market where capacity is simultaneously built and sold in long-term contracts when there is no spot market. The third model (closed-loop Cournot game) separates the investment and sales decision with investment in the first stage and sales in a second stage, that is a spot market. This two-stage game corresponds to investments in merchant plants where the first stage equilibrium problem is solved subject to equilibrium constraints. We show that despite some important differences, the openand closed-loop games share many properties. One of the important results is that the solution of the closed-loop game, when it exists, falls between the solution of the open-loop game and the competitive equilibrium.